Reigning In Runaway Punitive Damage Awards: The U.S. Supreme Court Limits Size of Permissible Awards
State Farm Mut. Auto. Ins. Co. v. CampbellApril 09, 2003
On Monday, the United States Supreme Court issued its long-anticipated opinion in State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. __ (2003) (No. 01-1289). In a significant victory for insurance carriers nationwide, the Court overturned a $145 million punitive damage award against State Farm for bad faith refusal to settle claims against its insured arising out of an automobile accident.
In the 6-3 decision, the Court decisively rejected the Utah Supreme Court’s decision to uphold a punitive-to-compensatory damages ratio of 145-to-1, sending the case back to the state court for further proceedings consistent with the Court’s opinion that a punitive damages award, in this case, "at or near the amount of compensatory damages" is appropriate. The decision significantly strengthens appellate courts’ obligation under BMW v. Gore, 517 U.S. 559 (1996), to assure that punitive damages awards comport with the requirements of due process.
Nature of the Case
In 1981, a State Farm insured, Curtis Campbell, caused an automobile accident that killed another driver and seriously injured one more. State Farm refused to settle the case for Campbell’s $50,000 policy limits and, instead, took the case to trial. A jury awarded $186,000 in damages against Mr. Campbell, exposing him to an excess judgment and, as a result, the loss of his home. In exchange for the plaintiffs’ agreement not to pursue Mr. Campbell on the excess judgment, Campbell agreed to allow the plaintiffs’ counsel to represent him in a bad faith claim against State Farm. In July of 1996, a Utah jury awarded Campbell $2.6 million in compensatory damages and $145 million in punitive damages against State Farm. The punitive damages phase of the trial emphasized what Campbell alleged was a "nationwide" scheme of underpaying claims.
The Court’s opinion addressed two issues: first, whether the trial court erred in admitting evidence of out-of-state (non-Utah) and unrelated conduct by State Farm to justify the enormous punitive damages award, and second, whether the $145 million in punitive damages was unconstitutionally excessive.
The Court began its analysis by expressing "concerns over the imprecise manner in which punitive damages systems are administered." State Farm, slip op. at 7. Those concerns "are heightened" when trial courts allow juries to hear and consider evidence that is, at best, tangentially related to the precise harm a plaintiff has suffered. That is what the Utah court did, impermissibly, when it allowed the jury to consider extensive evidence of State Farm’s twenty-year "scheme" to underpay claims across the country. The Court specifically criticized vague jury instructions as doing "little to aid the decision maker in its task of assigning appropriate weight to evidence that is relevant and evidence that is tangential or only inflammatory." Id.
The majority reiterated both the three-guidepost inquiry of BMW v. Gore, 517 U.S. 559 (1996), and the directive of Cooper Industries, Inc. v. Leatherman Tool Group, Inc., 532 U.S. 424 (2001), for trial courts to conduct de novo review of the constitutionality of punitive damages awards. The BMW guideposts are, generally, the reprehensibility of the defendant’s conduct, the disparity between the harm and the award, and the difference between the award and the civil or criminal penalties imposed in comparable cases. In applying these considerations, the Court declared that the State Farm case was "neither close nor difficult."
The Utah court had admitted most of the objectionable evidence of out-of-state conduct as relevant to the reprehensibility inquiry, and the Supreme Court considered the reprehensibility prong of the BMW analysis in great detail. The Court emphasized the reprehensibility factors noted in BMW: whether the harm was physical as opposed to economic, whether the defendant’s conduct evidenced an indifference to or a reckless disregard of the health or safety of others, whether the target of the conduct had financial vulnerability, whether the conduct involved repeated actions, and whether the harm was the result of intentional malice, trickery, or deceit. State Farm, slip op. at 8. The Court then noted that "the existence of any one of these factors weighing in favor of a plaintiff may not be sufficient to sustain a punitive damages award; and the absence of all of them renders any award suspect." Id.
The Court then discussed the extensive evidence of State Farm’s out-of-state conduct and concluded that such conduct is probative in the reprehensibility analysis only if that conduct has "a nexus to the specific harm suffered by the plaintiff." Id. at 11. "Due process does not permit courts, in the calculation of punitive damages, to adjudicate the merits of other parties’ hypothetical claims against a defendant under the guise of the reprehensibility analysis…." Id. Furthermore, "in the context of civil actions," the Court noted, "courts must ensure the conduct in question replicates the prior transgressions." Id. at 13. "[B]ecause the [plaintiffs] have shown no conduct by State Farm similar to that which harmed them, the conduct that harmed them is the only conduct relevant to the reprehensibility analysis." State Farm, slip op. at 14.
Turning to the second BMW guidepost, the Supreme Court again refused to provide a bright-line benchmark, but offered its most restrictive pronouncement, to date, on appropriate ratios of punitive-to-compensatory damages:
Our jurisprudence and the principles it has now established demonstrate . . . that, in practice, few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process. Id. at 14.
When compensatory damages are substantial, then a lesser ratio, perhaps only equal to compensatory damages, can reach the outermost limit of the due process guarantee. Id. at 15.
The Court then engaged in a novel analysis of the compensatory damages award in the State Farm
case. That compensatory award, Justice Kennedy wrote, was likely "based on a component which was duplicated in the punitive award." Id.
at 16. The Court elaborated that much of the plaintiffs’ suffering came in the form of emotional distress, outrage and humiliation, blurring the line of demarcation between punishment and compensation. The Court suggested that, because the plaintiffs’ compensatory award addressed the intangible elements of their harm, an even smaller punitive-to-compensatory ratio was appropriate for the State Farm
Finally, the State Farm
plaintiffs had attempted to justify the outrageous 145-to-1 ratio by emphasizing State Farm’s wealth and the "numerous" consumers that have been harmed by State Farm’s practices. The Court dismissed both assertions, confirming that "a defendant’s wealth cannot justify an otherwise unconstitutional punitive damages award," and noting that the plaintiffs failed to demonstrate harm to "the people of Utah (other than those directly involved in this case)." Id.
at 17. Comparability
The Court devoted less than one page to its comparability analysis, noting "we need not dwell long on this guidepost." Id.
at 18. The Court warned of the dangers in substituting punitive damages awards for criminal penalties:
Great care must be taken to avoid use of the civil process to assess criminal penalties that can be imposed only after the heightened protections of a criminal trial have been observed, including, of course, its higher standards of proof. Punitive damages are not a substitute for the criminal process, and the remote possibility of a criminal sanction does not automatically sustain a punitive damages award. Id.
Ultimately, the comparability factor weighed heavily against sustaining the punitive damages award. The maximum civil sanction for an act of insurance fraud under Utah law was $10,000, "an amount dwarfed by the $145 million punitive damages award." Id.
Good News for Insurance Companies
The State Farm
opinion brings good news to insurance companies nationwide. Even beyond its holding, the Court used language that should be helpful to carriers and their insureds defending against cases with the potential for punitive damage awards.
Perhaps most significant in this regard is the Court’s declaration that juries should generally not be permitted to consider an insurance carrier’s financial wealth when considering the constitutionality of a punitive damage award. The Court’s language might put the brakes on this practice – commonplace in most jurisdictions – by giving defendants and trial courts the tools to deny plaintiffs’ broad discovery requests focusing on a carrier’s financial records, as well as the tools to deny the admission of this type of evidence at trial.
Insurance companies should also be encouraged by the Court’s rhetoric. In his opinion, Justice Kennedy stated that the Utah Supreme Court had improperly and unfairly permitted the case to be "used as a platform to expose, and punish, the perceived deficiencies of State Farm’s operations throughout the country." With this decision carriers are in a stronger position to argue to trial courts that it is unfair to allow plaintiffs to seek and present evidence on claims or practices plainly unrelated to their claims.
The Court’s opinion makes clear that punitive damage awards cannot be used to assess punishment for acts unrelated to the case: "A defendant should be punished for conduct that harmed the plaintiff, not for being an unsavory individual or business." Carriers should use this language to argue that it is improper for trial courts to admit evidence that puts the carrier in an unfavorable light with the jury if the evidence is not relevant to the case and serves only to artificially inflate any punitive damages award.
The Court’s slip opinion can be accessed on the U.S. Supreme Court’s web site at www.supremecourtus.gov./opinions/02slipopinion.html
The Utah trial court remitted the compensatory damages award to $1 million. The remittitur was not challenged on appeal.